ET Now: The rupee was going down and for the last three or four sessions, it has been fairly volatile too. What is your call on rupee in the near term?

Moses Harding: Rupee has seen to be settled at 57-59 range. Close to 59, the demand supply equilibrium shifts to supply driven with 12-month dollars available above 62. Close to 57-57.5 range, there has been tremendous importers interest given the fear that rupee may further weaken to 60-62 levels. So, there is a conflict in expectations, economic and market dynamics.

While we watch 57-59, there is no clarity on breakout either into 54 or 62. So, we are taking a short term view on the market, looking at the developments in the macroeconomic environment in-house and externally also, where we have a very high dependency on offshore inflows into Indian markets.

ET Now: The debt markets for at least the previous two weeks have seen significant outflows. With a presumption that the RBI does not tinker rates, what happens to the yields and the bond prices in the near-term if the RBI were to pause on Monday?

Moses Harding: There is already a 1.5% squeeze in the 10-year between India and the US that has resulted in pull out of FII appetite for the Indian debt market. Given this scenario, RBI increasing the FII limit did not have any impact on the exchange market. But you have uncertainty both on the political and economic environment.

Although the monetary policy is shifting to growth, but the policy transmission is inefficient. There is high dependency on the external factor and the tailwinds are now shifting to headwinds.

Given this change in environment and the market forces, I tend to be very bearish on the near term. So, with the growth-inflation conflict in play, RBI continues to look at the retail inflation which remains high and now rupee is becoming a new issue. Hence, the ability to rate cut in the short-term for the next three months is limited.

We factor, probably another 25 bps rate cut in October to December. I think, the new 10-year bond yield will settle around 7.35-7.4%. I look for a stability in interest rates expecting OMO support on the downside with a limited bandwidth for a rate cut.

On the other hand, the PSU banks prefer CRR cut rather than repo cut because they provide liquidity in the short-term cash market and they face a margin squeeze in the event of rate cut. So, RBI should focus on the liquidity side rather than the rate side to enable them to push the lending rates down. But it would make sense for RBI to go with a 25 bps CRR cut this time.